Because you follow my blog, my position on traditional PBMs should be clear. They’re rent-seekers and should not be given blank checks, which essentially is what most plan sponsors do.  Read the following article by Bruce Shutan. Occasionally, I like to post a peer’s work to further illustrate my point(s).  Each party has an agenda, however it’s up to you to decide which side of the fence you’re going to join.

In June, the Supreme Court ruled 5-4 that the PPACA signed into law on March 21, 2010, is by and large constitutional. What does that mean to you as an employer? The change in course of healthcare delivery will proceed as planned when the law was passed. There will be subtle and not-so-subtle changes to which we must adapt.

As for action that must be taken by employers, there isn’t much. Most of the changes are occurring behind the scenes at the insurance company and insurance provider level. Summary of Benefits and Coverage (SBC) documents will need to be distributed to your employees and large employers (250+ employees) will have to track and report benefit costs to the IRS.

The biggest event will be on January 1, 2014, when the much talked about insurance exchanges are to be effective. Some employers are anxiously anticipating some relief from the health care burden once the exchanges are effective, while others are not so sure. It is clear now that most states will not have a reliable exchange in place by 2014. Theoretically, the federal government will step in and provide an exchange in any state that misses the deadline.

Employers plan on “off loading” their health care coverage to the state exchange by paying a penalty and giving employees cash to buy their own coverage much like employers dropped their old pension plans in favor of the “defined contribution” 401K programs. It is all about controlling costs. Federal tax subsidies are available in the state exchange (a family of four qualifies for the subsidy if their income is less than $88,000).

Employers simply can’t overlook this windfall. The problem will be that no subsidy will be granted if employees enroll in a private or federal exchange. In other words…. No state exchange, No federal subsidy. This may leave the employers holding the bag longer than expected. Off loading benefits may not happen as quickly as 2014. Is this good or bad…it depends on who you ask.

Consumer-driven health care plans (CDHP) typically have two components. First, they have an underlying traditional health plan that includes significant deductibles and/or coinsurance. Second, they have some type of individual health account that is used to offset the deductibles and/or coinsurance and that provides some type of tax advantage to the covered individuals.

The structure of the underlying health plan and the amount of control granted to the individual over the account distinguish one type of CDHP from another. Employers typically use one or both types of consumer driven health plans. These are health savings accounts (HSA) and health reimbursement arrangements (HRA). Health Savings Accounts (HSA) A HSA is an individual account that can be funded with employer and/or employee money, from which individuals can be reimbursed tax-free for qualified medical care.

Otherwise, the money accumulates with tax-free interest until retirement, when an individual can continue to withdraw funds for medical care tax-free or withdraw funds for any purpose and pay normal income taxes. Individuals own their HSAs. Individuals with a High Deductible Health Plan (HDHP) can open HSAs and make tax-free contributions in 2013 of up to $3,250 for individuals and $6,450 for families.

HDHPs are defined in 2013 as plans with deductibles of at least $1,250 for individual and $2,500 for family coverage. A HSA can be established for an individual who is covered by a HDHP that includes annual out-of-pocket limits of no more than: $6,250 for individual; $12,500 (for family); is not covered by another plan, except for certain permitted insurance; is not eligible to be claimed as a dependent on another person’s tax return; and is not enrolled in Medicare benefits.

Proponents of HSAs say that these accounts will reduce a participant’s overall health care costs without adversely affecting the participant’s health. HSAs also create a tax incentive to save for future health care expenses and decrease dependency on health insurance. They could offer a way to help employees accumulate funds over time to pay for retiree medical coverage. The overall intent is to shift some small health care spending decisions to the cost conscious individual consumer.

Health Reimbursement Arrangements (HRA) Employer-funded HRAs can allow annual unlimited rollover of unused balances and may be tax-free to employees provided they meet certain requirements. HRAs typically are used with HDHPs, in which part or all of the deductible can be reimbursed through the HRA. HRAs are available to current employees and retirees, their spouses and dependents, spouses and dependents of deceased employees, and COBRA qualified beneficiaries, but not to the self-employed.

HRAs are not taxable to employees and cover only medical expenses as defined by the plan provisions. They must comply with the nondiscrimination requirements of a self-funded health care plan and are subject to COBRA continuation coverage requirements. Employers own the HRAs and can determine whether and how the money may be used (rolled over) in subsequent years.

Click here for a side-by-side comparison:  HSA vs. HRA

Thanks to SCOTUS (Supreme Court of the United States), the country now has a new law pledging national health care reform. 

• Automatic enrollment: Employers with more than 200 employees are required to enroll new employees in their health care plan, subject to any waiting period. Employers must provide notice of employees’ right to opt out of automatic enrollment.

• Notice of coverage options: Employers must give employees notice about the availability of an insurance exchange.

• Penalty for not providing insurance: Employers with over 50 employees that do not provide insurance must pay a penalty of $2,000 for every employee in the company if even one employee opts to obtain insurance through an exchange. However, the first 30 employees are not counted in calculation of the penalty. Example: an employer with 75 employees would pay the penalty for 45 workers, or $90,000 (45 x $2.000).

• Penalty for providing insurance that is “too expensive”:  Employers with more than 50 employees that do provide insurance must pay a penalty if any of their employees obtain a subsidy to help pay for insurance. The penalty equals $3,000 per worker who uses the subsidy OR $750 for every employee at the company, whichever is less.

It’s finally become painfully clear to me the primary goal of healthcare reform. No, it’s not to reign in rising healthcare cost and it’s certainly not to improve patient outcomes. The primary goal of healthcare reform is defragmentation or to reorganize in order to prevent fragmentation. If I’m correct there are more losers than winners.

I’ve discussed, at length, in previous posts the inability of Walgreens and Express Scripts to come to a mutual agreement. Now Walgreens, the largest chain drugstore in the USA by almost 2/1, has agreed to purchase a 45% stake in Alliance Boots for $6.4 billion. Boots is a leading international, pharmacy-led health and beauty group delivering a range of products and services to 21 countries primarily in Europe. This investment makes Walgreens the largest single purchaser of prescription drugs in the world.

Why would Walgreens make such a large investment even before the Supreme’s Court ruling on PPACA? In cities all across America small healthcare entities are being gobbled up by behemoth healthcare organizations. Small physician practices are closing their doors only to become salaried employees at hospitals. Not independent contractors as is customary, but salaried employees taking a steep pay cut.

Small hospitals are being acquired by larger hospital corporations and these hospitals are purchasing specialty physician groups. Take the Kansas University Hospital acquisition of a 42,000-square-foot inpatient surgical hospital building to add to its system of services. The hospital plans to hire the facility’s more than 130 non-physician employees. KU Hospital intends to use the building for surgery by a variety of specialties. A new name for the building will be announced later, along with the specialties using the new space.

KU Hospital did not disclose the cost of the transaction, which is expected to close in the early summer. The Heartland Surgical Specialty Hospital plans to relocate its operations to a new location, according to the KU Hospital release. This is the purchase of a business disguised as a “building” purchase.

Heartland is going to relocate without its 130 non-physician employees, really? Many of Heartlands physicians will join KU hospital as salaried employees.

The purpose of defragmentation is control. The federal government wants to have more say about how healthcare is distributed in this country. Small self-insured (grandfathered) businesses have largely been unaffected by healthcare reform. In fact, my opinion is that PPACA has offered small and medium size businesses more choices at least until now.

The Obama administration is investigating the possibility of imposing limits on stop-loss coverage that could severely undermine the ability of small and midsize businesses to offer self-insured plans. It stems from a formal request for information about federal rules relating to stop-loss insurance, which is seen as a precursor to a regulation.

Critics contend that such a move would force these employers to adopt less flexible, fully insured plans and funnel millions of Americans into health insurance exchange that are slated to take effect in 2014 under PPACA. They also are crying foul about big business having an unfair advantage and raising questions about what may be motivating regulators to pursue this action.

Several leading Republican senators have sought an explanation from the Departments of Treasury, Labor, and Health and Human Services as to why they submitted an RFI. Olympia Snowe (R-Maine), Michael Enzi (R-Wyo.) and Tom Coburn, M.D. (R-Okla.) recently wrote in a letter that stop-loss insurance “is critical for operating a predictable, affordable self-insured health plan. Any possible disruption of these services is of paramount concern to lawmakers, employers, and tens of millions of plan participants.”

Lobbyists for small businesses and self-insured plans are sounding their own alarms over the prospect of stop-loss restrictions on self-insurance.  “The preamble of the RFI clearly demonstrates that the regulators have received significant disinformation about how the self-insurance marketplace actually operates and the role of stop-loss insurance,” explains Mike Ferguson, COO of the Self-Insurance Institute of America, Inc. in Simpsonville, S.C.

Amanda Austin, director of federal public policy for the National Federation of Independent Business in Washington, D.C., believes that the proposal is partly driven by a desire to ramp up PPACA insurance exchanges, calling it “one of many examples of PPACA-inspired micromanagement of health care.” NFIB fears that requiring its members to shuffle more paper will interfere with business growth.

The writing is on the wall. With help from the federal government, large healthcare firms are in acquiring mode. From pharmacy chains to hospitals to PBMs each is looking for a way to account for lower margins. The federal government will foot more of the bill thus profit margins will come down. But, any loss in profit margin will be made up for through volume.

The lower the number of players in the market the more control and power the government exerts. This ultimately will lead to higher prices and lower quality services. Consider the airline industry. There are fewer players and prices have drastically increased while the quality of service has suffered. In fact, airline industries have become down right arrogant. In the case of healthcare reform, history will undoubtedly repeat itself.

Rent-seeking is a term economists use to describe an organization’s ability to generate above average economic returns without providing any relative incremental value. Wikipedia may explain it a bit better.

Wikipedia Definition

The simplest definition of rent-seeking is to expend resources in order to gain wealth by increasing one’s share of currently existing wealth instead of trying to create wealth. Since resources are expended but no new wealth is created, the net effect of rent-seeking is to reduce total social wealth. It is important to distinguish between profit-seeking and rent-seeking.

Profit-seeking is the creation of wealth, while rent-seeking is the use of social institutions such as the power of government to redistribute wealth among different groups without creating new wealth. Rent-seeking generally implies extraction of uncompensated value from others without making any contribution to productivity.

The origin of the term refers to gaining control of land or other pre-existing natural resources. In a modern economy, a more common example of rent-seeking would be political lobbying to obtain government benefits/subsidies or to impose burdensome regulations on competitors in order to increase market share.

Studies of rent-seeking focus on efforts to capture special monopoly privileges such as manipulating government regulation of free enterprise competition. The term monopoly privilege rent-seeking is an often-used label for this particular type of rent-seeking. Often-cited examples include a lobby that seeks tariff protection, quotas, subsidies, or extension of copyright law.

How does a traditional PBM employ a rent-seeking methodology?

Most recently, the FTC approved the acquisition of Medco by Express Scripts. The net effect of this purchase is not a creation of new wealth, but instead a reduction in social wealth. The FTC approval of this acquisition will ultimately benefit only the government, Express Script and Medco stockholders.

Patients won’t pay lower prices or see a real difference in their health care outcomes. Retail pharmacies and PBM competitors certainly won’t benefit from this acquisition. History tells us that greed will supersede social responsibility almost 100% of the time. Express Scripts has used the government, with powerful lobbying, to attain near monopolistic privileges.

Some state governments, Texas for example, require PBMs to take on the role of a fiduciary. The problem is that this requirement doesn’t extend to private enterprise. I say it’s a problem not because the government hasn’t interfered, but the opposite. Private enterprise hasn’t exercised its right to require a fiduciary role from their PBM. A transparent PBM, acting as a fiduciary, shares the risk and essentially agrees to be 100% transparent in all of its related business dealings.

This transparency includes sharing third party pricing contracts with pharmacies and rebates from manufacturers. It also includes offering real-time access to MAC price lists for retail and captive mail-order pharmacies. As specialty drugs become a larger part of the dispensing mix, it’s imperative to be fully aware of pricing arrangements between biotechnology companies as well. Here is an example of a typical fiduciary disclosure in a transparent PBM contract.

In a classic bait and switch George Paz, CEO of Express Scripts, has subtly lowered the expectations for the ESI and Medco merger.  As I learn more about George I’m not quite sure what to think about him.  Here is what I’ve gathered thus far.  He’s a shrewd businessman, but not very smart, yet he’s smart enough and frugal.  George is also aggressive, but will change his position faster than Cory Booker if it will bring ESI an advantage.  Sometimes to the detriment of his stakeholders.

Here are a few excerpts from an interview he participated in with the Wall Street Journal.  It was published on May 23, 2012.

WSJ:  What were the biggest disagreements with Walgreen?
Mr. Paz:  I should only be paying for things that matter.  I shouldn’t be paying for things that don’t matter.  And, if Walgreen wants a premium, and they’re not doing anything different, why should I pay them more?  One of the issues was the way Walgreen defined generic drugs.  That would have been a billion dollar effect on my book of business.  That would’ve been a huge windfall back to Walgreen that doesn’t exist in any of my other [pharmacy] contracts.

[Regarding paying a premium, a Walgreen spokesman said virtually all other payers see that we are in line with the market and have us in their networks.”  On generics, the spokesman said that “Express Scripts insisted on being able to unilaterally define contract terms, including what does and does not constitute a brand and generic drug.”]

WSJ:  Talk about the role pharmacists should play in healthcare.
Mr. Paz:  I said one time that it shouldn’t matter who counts to 30 for filling up retail prescriptions, and I caught a lot of grief for that, and probably rightfully so. But that wasn’t the point.  The point is that putting pills in a bottle doesn’t change health outcomes.  It doesn’t matter whether you get your pills at Walgreen or CVS or Kroger.  The reality is:  What happens with that process?  Who is taking care if that patient?  It’s not counting pills and sticking them in bottles.  That doesn’t add any value.

WSJ:  How does Express Script use its pharmacists?
Mr. Paz:  I’ve taken those pharmacists and asked them to reach out to doctors.  Doctors still misprescribe very often.  They leave gaps with care.  People with asthma, they they don’t take their inhalers, they wait until they’re sick, and by then, it’s too late.  Now we’re already running up the bills and going to the emergency rooms.  We’re using our pharmacist to do the things they were educated to do, not to count pills.  That’s not where the value is.

WSJ:  How might the company’s size help drive down healthcare costs for individuals?
Mr. Paz:  Medicare and Medicaid costs are skyrocketing.  The cost of compliance with some pretty tough rules has become very costly.  If I’m small, I have to spend the same amount of money to comply with Medicare, whether I’m 10 members or I’m 10 million.  By creating size and scale, I can spread those covers over more and more people, and therefore lower the costs per person.

There are so many contradictions in these statements I don’t even know where to begin.  First, he talks about paying only for things that matter.  Well I’ve repriced more than enough of Express Scripts claims data to know that his clients are, in fact, paying far too much for things that don’t matter.

And you’re using pharmacists to call doctors at $55/hr?  Primary Care Physicians are extremely busy and it takes several call backs to reach them.  They don’t want too hear anyone tell them about their gaps in care especially a PBM that restricts their prescribing options.  This is a waste of time and money.  Particularly, when you consider the increasing popularity of e-prescribing.  Sounds to me like Express Scripts is searching for a reason to charge more for their service even when it doesn’t add value.  Control what you can control by implementing more compliance packaging, for example.

Furthermore, if Walgreen’s, one of the largest pharmacy chains in the world, statement is even partly true with regard too Express Script’s desire to unilaterally determine contract language then where does that leave a small to midsize company?  No chance to not pay for things that don’t matter is what’s left for smaller companies dealing with Express Scripts.

There is so much incentive provided in this interview for payors to re-evaluate their pharmacy benefit. But, unfortunately most won’t.  Who cares if your PBM account manager and/or consultant is telling you it’s raining outside when really they’re peeing down your back. George Paz said, “our size should help drive down costs for consumers.”  Before the merger was approved it was, “will drive down costs for consumers.”

I’m not saying that ESI doesn’t provide a good service.  Instead, I’m saying that their customers aren’t being educated and as a result are paying far too much for similar services they could get for 20 to 30% less. You could be saying too yourself who am I too judge the CEO of a fortune 50 company. He must be more intelligent, trustworthy and industrious compared to the owner of a boutique PBM, right?  I’ve got two words for you – George Bush.

Today, most health plans have one level of benefits for care rendered by an in-network provider and a lower benefit for services from an out-of-network provider.  Insurance carriers encourage use of in-network providers because doing so helps control claim costs.

In-network providers have contracted with the insurance companies to provide medical care at reduced prices.  In exchange, the insurance companies direct patients to the in-network providers. The arrangement increases business for the providers and decreases claims cost for the insurance company.

Treatment out-of-network is a different story. Out-of-network providers have no agreement or incentive to reduce prices and control cost.  At times, however, they may provide a level of care or service that a particular patient needs or wants.  Patients seeking care out-of-network need to be aware of the way their benefits will be calculated.

There is more to it than the out-of-network deductible and co-insurance. Insurance policies have clauses and exclusions against treatment that is not medically necessary.  There are also provisions that the carrier only allows the Usual, Customary, and Reasonable (UCR) charge for a service provided.

Over the last few years, many carriers have begun to define their allowable charge or UCR limit as the amount negotiated with in-network providers. The difference can be substantial. For instance, if the retail price of a surgery is $4000, the discounted amount could be $2500, a $1500 discount.  If in-network benefits are paid at 80%, the patient would owe $500 for the surgery (20% of $2500). A patient receiving care out-of-network would not receive the benefit of the discount.

Out-of-network benefits may be paid at 60%. The patient’s responsibility is 40% of the UCR amount of $2500 or $1000, plus the difference between retail and the UCR amount ($4000 – $2500) or another $1500.  The total owed by the patient would be $2500 on a $4000 surgery.

To avoid surprises, it is important that your employees understand how out-of-network benefits are calculated.  Some providers will agree to write off all or part of the balance.  A financial agreement before receiving services is critical.  After services are rendered, many providers are not willing to discuss discounts.

Physicians’ political views on healthcare reform vary widely, but the findings of a recent survey by Jackson Healthcare show that many agree on at least one thing:  PPACA does not sufficiently reform the U.S. healthcare system. Jackson Healthcare conducted an online national survey of physicians to ascertain whether respondents believe PPACA effectively addressed previously stated physician concerns about healthcare reform. Those concerns, identified in earlier physician surveys by Jackson Healthcare, were stated as such:

• Defensive medicine is a key driver of the ever-expanding cost of U.S. healthcare
• Defensive medicine has important effects beyond cost
• Tort reform fails to reduce the practice of defensive medicine

1,440 physicians completed the latest survey. Analysis of the responses indicates physicians do not believe PPACA provides the necessary reforms to alleviate their concerns and they gave PPACA an average grade of D.

Key Findings:

• Nine out of ten physicians do not believe PPACA provides effective reform
• 38 percent believe PPACA did nothing to reform the healthcare system
• 31 percent believe PPACA did not go far enough
• 22 percent believe PPACA went too far and will impede physicians’ ability to practice medicine
• 52 percent of physician respondents believe PPACA will negatively affect their practice through    decreased reimbursements, revenues and longer work days
• 20 percent of physician respondents believe PPACA will positively affect their practice as more patients access care and the number of no-pay cases decreases
• 11 percent of physicians are making changes to their practices in response to PPACA, including EMR / HER implementation, changing careers / retiring, opting out of Medicare / Medicaid

Physicians are equally divided on whether PPACA should be repealed (52 percent in favor of repeal
vs. 48 percent).

HSA Qualified Medical Expenses: Confusion between 502 and 213

Confusion exists about what is a qualified medical expense for Health Savings Account (HSA) withdrawals.  Different government sources refer to IRS codes sections 502 and 213, as do industry sources.  Consumers want a list of qualified medical expenses yet no one, not even the government, is willing to commit in writing.

I will attempt to clarify this confusing HSA issue. The Treasury Department has released guidance for HSA implementation and use.  Treasury Notice 2004-2 was issued to clarify HSA rules and issues. Answer 26 of the guidance states “qualified medical expenses are expenses paid by the account beneficiary, his or her spouse or dependents for medical care as defined in Section 213d but only to the extent the expenses are not covered by insurance otherwise.”

This seems clear enough.  So where does the 502 language come into play? IRS Publication 969 (instructions for HSAs) says that qualified medical expenses are explained in Publication 502. I believe 213 and 502 provide essentially the same guidance to HSA beneficiaries. Internal Revenue Code 213d is the actual code section dealing with the definition of medical expenses. IRS Publication 502 is the tax filing instructions when claiming medical and dental expenses on your tax return. Publication 502 is a summary of IRC 213 and is more simply written.

Hopefully, this provides some clarification on this matter.  The aforementioned is my opinion; I cannot render tax or legal advise.  Please consult your attorney or tax advisor to review the facts and circumstances of your particular case.

U.S. health insurers will pay $1.3 billion in rebates to consumers and employers this year under a provision of President Barack Obama’s healthcare reform law that penalizes plans that devote too little of their premium revenues to health services, an independent study showed on Thursday.

The study, published by the nonpartisan Kaiser Family Foundation, said the data illustrated some of the tangible benefits that consumers and employers could expect from the embattled 2010 reform law if it survives two major legal and political election-year challenges.

Under the law, called the Patient Protection and Affordable Care Act, health insurers must spend at least 80 percentage of premium revenues on health expenses and quality improvements. The rule is intended to limit the amount the $850 billion health insurance industry devotes to marketing, administration and profits.

Kaiser, a nonprofit healthcare research group, found that 31 percent of consumers in the individual insurance market could expect to receive a total of $426 million in rebates on 2011 premiums, for an average of $127 per person.

About 20 percent of the insurance industry’s market for large employers could receive $541 million, while more than one-quarter of the small group market that serves small businesses could look forward to rebates totaling $377 million. The rebates are due by Aug. 1 and most of the money is expected to go to employers rather than consumers.

The healthcare law has proved unpopular with many voters and could be struck down by the U.S. Supreme Court by the end of June or repealed next year if Republicans gain control of the Congress and White House in the November election. If the high court overturned the law, insurers would no longer be required to comply with the rebate provision.

A main target for public dislike is a reform provision that requires most Americans to buy private health insurance by 2014 as part of a plan to extend health coverage to more than 32 million people who are uninsured.

Reform advocates insist that much of the public’s dislike for the law stems from a lack of knowledge about the advantages it offers to consumers and others.

Some of the biggest rebate payouts are expected in states, including Texas and Florida, where the reform law faces some of its stiffest opposition from Republican politicians and other conservatives.

“While the health reform law as a whole continues to divide the American public, there are tangible changes taking place that benefit consumers,” said Kaiser President Drew Altman.

“Greater regulatory scrutiny of private insurance is improving value and helping to get excess costs out of the system,” he added.

The Kaiser study is based on insurer filings to the standard-setting National Association of Insurance Commissioners and includes rebates already paid and insurer estimates of planned payments on 2011 premium revenues.